The Death of the Triple-A Sovereign

Are we witnessing the end of the gold-plated triple-A rated sovereign borrower? Willem Buiter, Citigroup’s chief economist and a noted academic, thinks so.

In a new piece of research, released today, the former member of the Bank of England’s Monetary Policy Committee argues that in five years’ time, there will be no top-rated governments left.

The good news in his 68-page report on Sovereign Debt Problems in Advanced Industrialized Economies is that, on the whole, governments won’t default. The bad news: Most will have to embark this year on five or 10 years of severe fiscal austerity.

Mr. Buiter identifies seven rich-country governments in reasonable financial shape: Australia, New Zealand, Denmark, Norway, Sweden, Finland and Switzerland. Some other advanced economies–such as Canada, Germany and the Netherlands–appear in relatively good shape “only compared to the truly dire conditions experienced by most of their peers.”

He says the current market focus on the five weakest members states of the euro zone is surprising given that the fiscal and financial position of the euro area as a whole is stronger than that of the UK, the US and Japan. Sooner (the UK) or later (Japan and the US), these three countries are at risk of being denied access to new funding “unless there is a radical change of course by those in charge of fiscal policy.”

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